Financial Industry Regulatory Authority (FINRA) Practice Exam

Where do transactions between investors buying and selling securities occur?

1. In the primary market

2. In the secondary market

3. Only on exchanges

4. Only in the over-the-counter market

The correct answer is: In the secondary market

Transactions between investors buying and selling securities primarily occur in the secondary market. This market is where previously issued securities are traded among investors. In the secondary market, there is no impact on the issuing company; instead, it involves transfers of ownership between buyers and sellers. The primary market, on the other hand, is where new securities are created and sold directly by the issuing company to investors for the first time. Once these securities are issued, they enter the secondary market, where trading takes place. Additionally, while exchanges and over-the-counter (OTC) markets are both venues for trading securities, transactions in the secondary market can occur in either setting. Hence, stating that trades happen only on exchanges or only in the OTC market is too limited and does not encapsulate the full scope of where secondary market transactions occur. Thus, the secondary market is the broader and more accurate answer for where these transactions happen.